ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL OVERVIEW

The Company began operations in September 1993 and initially focused on the acquisition of producing properties. As a result of the increasing availability of economic onshore 3-D seismic surveys, the Company began to obtain 3-D seismic data and options to lease substantial acreage in 1995 and began to drill its 3-D based prospects in 1996. The Company drilled 32, 39 and 25 gross wells in the Gulf Coast region in 1999, 2000 and 2001 respectively. The Company has budgeted to drill 16 gross wells (6.6 net) in 2002 in the Gulf Coast region; however, the actual number of wells drilled will vary depending upon various factors, including the availability and cost of drilling rigs, land and industry partner issues, Company cash flow, success of drilling programs, weather delays and other factors. If the Company drills the number of wells it has budgeted for 2002,
depreciation, depletion and amortization are expected to increase and oil and gas operating expenses are expected to increase over levels incurred in 2001. The Company has typically retained the majority of its interests in shallow, normally pressured prospects and sold a portion of its interests in deeper, over-pressured prospects.

The financial statements set forth herein are prepared on the basis of a combination of Carrizo and the entities that were a party to the Combination Transactions. Carrizo and the entities combined with it in the Combination Transactions were not required to pay federal income taxes due to their status as partnerships or Subchapter S corporations, which are not subject to federal income taxation. Instead, taxes for such periods were paid by the shareholders and partners of such entities. On May 16, 1997, Carrizo terminated its status as an S corporation and thereafter became subject to federal income taxes. In accordance with SFAS No. 109, "Accounting for Income Taxes," the Company established a deferred tax liability in the second quarter of 1997, resulting in a noncash charge to income of approximately $1.6 million.

The Company has primarily grown through the internal development of properties within its exploration project areas, although the Company acquired properties with existing production in the Camp Hill Project in late 1993, the Encinitas Project in early 1995 and the La Rosa Project in 1996. The Company made these acquisitions through the use of limited partnerships with Carrizo or Carrizo Production, Inc. as the general partner. In addition, in November 1998 the Company acquired assets in Wharton County, Texas in the Jones Branch project area for approximately $3,000,000.

During the second quarter of 2001, the Company formed CCBM, Inc. ("CCBM") as a wholly-owned subsidiary. CCBM was formed to acquire interests in certain oil and gas leases in Wyoming and Montana in areas prospective for coalbed methane and develop such interests. CCBM plans to spend up to $5 million for drilling costs on these leases through December 2003, 50 percent of which would be spent pursuant to an obligation to fund $2.5 million of drilling costs on behalf of RMG, from whom the interests in the leases were acquired. CCBM drilled 31 gross wells (12.0 net) and incurred total drilling costs of $819,000 through December 31, 2001. These wells typically take up to 18 months to evaluate and determine whether or not they are successful. CCBM has budgeted to drill 30 gross (15 net) wells in 2002.

Prior to the Offering, Carrizo conducted its oil and natural gas operations directly, with industry partners and through the following affiliated entities: Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd. and Placedo Partners Ltd. Concurrently with the closing of the Offering, Combination Transactions were closed. The Combination Transactions consisted of the following: (i) Carrizo Production, Inc. merged into Carrizo; (ii) Carrizo acquired Encinitas Partners Ltd. in two steps: (a) Carrizo acquired the limited partner interests in Encinitas Partners Ltd. held by certain of the Company's directors and (b) Encinitas Partners Ltd. merged into Carrizo; (iii) La Rosa Partners Ltd. merged into Carrizo; and (iv) Carrizo Partners Ltd. merged into Carrizo. As a result of the merger of Carrizo and Carrizo Partners Ltd., Carrizo became the owner of all of the partnership interest in Placedo Partners Ltd.

The Company uses the full-cost method of accounting for its oil and gas properties. Under this method, all acquisition, exploration and development costs, including any general and administrative costs that are directly attributable to the Company's acquisition, exploration and development activities, are capitalized in a "full-cost pool" as incurred. The Company records depletion of its full-cost pool using the unit-of-production method. To the extent that such capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes) exceed the present value (using a 10 percent discount rate) of estimated future net after-tax cash flows from proved oil and gas reserves, such excess costs are charged to operations. Based on oil and gas prices in effect on December 31, 2001, the unamortized cost of oil and gas
properties exceeded the cost center ceiling. As permitted by full cost accounting rules, improvements in pricing subsequent to December 31, 2001 removed the necessity to record a ceiling writedown. Using prices in effect on December 31, 2001 the ceiling writedown would have been approximately $700,000. Because of the volatility of oil and gas prices, no assurance can be given that the Company will not experience a ceiling test writedown in future periods. Once incurred, a write-down of oil and gas properties is not reversible at a later date.